Tax Increase or Not?

It’s too early to tell if the Tax Council’s recommendations will result in a tax increase. The Council says their aim was to be revenue neutral, but the report (probably due to the lack of some critical information) makes it seem otherwise.

There are three calculations missing from the Tax Council’s report:

1) The report calls for fewer Georgia-specific adjustments to federal adjusted gross income. How much will this broaden the personal income tax base?

2) The report calls for eliminating all exemptions and deductions except for a dependent exemption of $2,000. How much will this broaden the personal income tax base?

3) The report calls for tax credits designed to offset the loss of exemptions, deductions and the tax on groceries for low-income Georgians. How much will this reduce revenue?

Once we have this information, we will have a much better idea what tax rate gets us to a revenue neutral result.

Another problem is the difficulty of projecting tax revenues. It is unfortunately necessary to use federal data since state-specific data at the detail level necessary is usually not available. Second, there are multiple, legitimate sources of data. For example, do you use the Bureau of Economic Analysis’ personal consumption data (part of the Gross Domestic Product report) or the Census Bureau’s Consumer Expenditure Survey? Even if you think you have picked the right source, the data is usually several years old (2009) and you are trying to predict the future (2011-2014).

The first question is to determine the best tax structure for Georgia. Most economists will tell you that the best tax structure is the broadest tax base possible. A good structure is a good structure, regardless of whether you are raising or lowering taxes.

The next step is to determine the amount of revenue needed. We won’t know the answer to this until the budget is completed. This is where fiscal conservatives should focus their efforts. Taxes are driven by spending, so if you do not want a tax increase help our state leaders find cuts in the budget and then support their decisions.

The final step is to figure out what happens if more revenue comes in than anticipated? There are several options, but the best is to make sure that excess revenues are used to shore up our reserve fund, pay off debt or reduce tax rates.